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Gold price analysis: Is the precious metal about to enter a bear market?

09:09, 23 September 2022

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  • Natural Gas
    Natural Gas
    6.937 USD
    -0.04 -0.580%
  • Gold
    Gold
    1661.44 USD
    0.2 +0.010%

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gold bars and bear
Bear market for precious metals represented by bar of gold and a bear in the background – Photo: Shutterstock

After falling 20% from its March 2022’s peak, gold is trading on the verge of a bear market.

Many traders are wondering whether the precious metal will enter a deep bear market phase as the Fed continues to raise interest rates, or if the drawdown phase seen thus far has reached a bottom as the economy slows.

The Federal Reserve's rate hikes have exerted substantial downward pressure on gold this year, but not as much as would be predicted by real rates. Using US 10-year real yields as a guide, the price of gold should have been between $1100 and $1300 per ounce.

Despite everything, and we're talking about 325 points of rate hikes with another 125 on the way before the end of the year, gold has held up relatively well in comparison to other major assets, excluding the dollar, of course. Gold’s year-to-date performance was superior to both the stock and the bond markets.

Some factors have prevented a significant drop in gold prices, and they all point to rising economic and geopolitical uncertainties. Gold is the asset of fear; its value tends to increase during times of turmoil, when everything else is in disarray.

Thus, are we approaching a painful economic phase in which precious metals regain their lustre?

Gold's performance vs major asset classes year-to-date

a chart showing the performance of gold vs major asset classesGold, S&P 500 index, Treasury bond, Global bond, US dollar index (DXY) and S&P GSCI index: year-to-date returns – Photo: Capital.com, Source: Tradingview

As of September 23, 2022, gold has lost 7.4% since the beginning of the year.

When compared to other major assets, the precious metal outperformed both the bond and stock markets.

The S&P 500 (US 500) declined by 21.7%, long-term US Treasuries (TLT) lost 26% and a 12.9% drop was seen in the Vanguard total bond market ETF (BND). Further reading: "S&P 500 index to gold ratio: What does it mean and where might it go?"

Gold underperformed when compared to both the US dollar index (DXY), which increased by 16.2% year-to-date, and the S&P GSCI Commodity Index (GSG), which increased by 10.6% year-to-date due to an increase in the price of energy commodities such as oil and natural gas.

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Gold is wounded but not killed by US real yields

a chart showing the inverse relationship between gold and real yieldsGold price (inverted axis-LHS) vs US real yields (RHS) – Photo: Capital.com, Source: Tradingview

Given where real rates are now and how they have risen since the beginning of the year, gold should have lost much more than it has.

The strong inverse relationship between gold and US 10-year real yields suggests that the metal could trade in the $1100-1300/oz range.

When real yields broke the 1% barrier in 2018, gold was trading around $1,250/oz.

So, why has gold held up so well in comparison to where real yields are now?

A war has erupted in Ukraine, an inflation and energy crisis is wreaking havoc on Europe, equity markets are in decline, and the Federal Reserve has delivered massive policy tightening in just a few months. Is there anything else to say about today's uncertain global economic backdrop? 

Gold

1,661.44 Price
+0.010% 1D Chg, %
Long position overnight fee -0.0157%
Short position overnight fee 0.0056%
Overnight fee time 21:00 (UTC)
Spread 0.60

Silver

19.06 Price
+1.090% 1D Chg, %
Long position overnight fee -0.0117%
Short position overnight fee 0.0025%
Overnight fee time 21:00 (UTC)
Spread 0.040

Oil - Brent

85.10 Price
-2.580% 1D Chg, %
Long position overnight fee 0.0461%
Short position overnight fee -0.0715%
Overnight fee time 21:00 (UTC)
Spread 0.04

Oil - Crude

79.31 Price
-2.390% 1D Chg, %
Long position overnight fee 0.0226%
Short position overnight fee -0.0420%
Overnight fee time 21:00 (UTC)
Spread 0.03

Hard landing of the economy = gold's takeoff?

a chart showing how gold prices tend to move in line with the economic policy uncertainty indexGold and Economic policy uncertainty index for the United States – Photo: Capital.com, Source: Tradingview

When economic fears rise and spread across global markets, gold serves as a safe-haven shelter.

Gold prices appear to track and move in lockstep with the trend in the US Economic Policy Uncertainty index.

The Economic Policy Uncertainty index for the United States is derived by monitoring the economic and policy uncertainty terms used in the country's most popular news newspapers.

When the Economic Policy Uncertainty index starts an upward trend, the price of gold tends to strengthen, and vice versa.

The Federal Reserve's latest economic projections show growth falling to 1.2% in 2023 (from 1.7% in June), the unemployment rate rising to 4.4%, core PCE inflation remaining above target until 2025, and interest rates reaching a peak of 4.6%.

Summary of Economic Projections as of September 2022 FOMC meeting – Photo: Federalreserve.gov

In his last press conference, Jerome Powell described the path to return inflation to 2% as "painful."

It's a scenario that could foreshadow a "hard landing" for the American economy, with growth well below potential, rising unemployment, and lower real incomes due to sticky inflation. 

If the stock market is destined for further declines, gold may be viewed as the best hedge entering a period of economic contraction.

Gold prices have never experienced a significant bear market in response to economic difficulties.

Gold chart analysis: Bottomed out? 

Gold technical analysis as of September 23, 2022 – Photo: Capital.com, Source: Tradingview

Gold is battling with its lowest levels since mid-April 2020 at the $1,650-1,660 range. 

Technically speaking, the situation is still quite bearish and a trend reversal does not occur overnight.  The RSI is pointing downward, the MACD is below the zero line and recent bullish crossover attempts have failed.

The price action indicating that the bears' advance is being stopped by bull support at $1,653-1,660 area is the only encouraging sign this week. 

If this support region is broken, the next supports are $1,641 (8 April 2020 lows), then $1,568 (1 April 2020 lows), and the severe 1,451 (March 2020 lows).

The nearest resistance is located at $1,731 (50-day moving average and September highs) and then at $1,751 (23.6% Fibonacci level of 2022 high-low).

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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